Pandora Says Musicians Will Get More if It Pays Less. How Does That Work?

The latest round of Pandora vs. the music business is really complicated, because music licensing is really complicated.*

It’s also very simple: Pandora wants to spend less money on music rights every time it streams a song over the Web. Many people who own music rights want Pandora to spend more.

But wait a minute. Doesn’t Pandora say that’s not true?

In a blog post published last week, founder Tim Westergren said Pandora is actually “advocating for solutions that would grow total payments to artists.” It’s a message he repeats all the time, as in yesterday’s interview with the Financial Times: “Our goal is to have those total payments go up.”

Time for a translation: What Westergren and other Pandora executives are really arguing is that if they spend less on each stream of music they distribute, rights-holders will collectively end up with more money.

Perhaps they are not being as clear about that as they ought to be, and perhaps that’s because the argument is a bit hard to accept.

Because Pandora’s rights payouts are based on usage. And Pandora users, who don’t pay for the ad-supported service,** won’t listen to more or less music if the company’s fee structure changes.

So how would lower streaming fees end up growing the pie? I went around and around on this with Westergren and outgoing Pandora CEO Joe Kennedy at a press event in January during CES. They were briefing reporters on the rights issue, out of a suite in the Wynn, in anticipation of this very fight. I’ll do my best to paraphrase their arguments:

If Pandora’s rates are lower, then Pandora can stay in business. And Pandora is growing — users were up 33 percent in May and usage was up 22 percent — so if that keeps up, the company would ultimately generate more royalties for rights holders.

If Pandora’s rates are lower, that means that rates for every similar Web radio service would be lower, too. And that would spur more people to enter the business and create even more usage and more royalties.

Does that argument convince you?

Maybe that’s why Pandora doesn’t spend much time talking about it. Instead, it spends most of its time talking about “fairness” and “level playing fields.”

And as far as that goes, the company has a perfectly reasonable argument. Byzantine rights rules mean that different kinds of radio stations have different fee structures, and conventional radio stations have a tremendous advantage over the newcomers.

You can take either side of the debate, without getting into the minutiae of rates and the Copyright Royalty Board, etc., with equal passion. Pandora can argue convincingly that it is providing promotion for artists who really need it, and that whatever money it does pay rights holders is a whole lot better than nothing.

And the music business can argue that Pandora is building a very big business (current market cap: $3.4 billion) while rights holders get not very much — at a time when they desperately need money to replace the vaporized CD business.

But I think Pandora could make a stronger case if it were clearer about exactly what it’s trying to do. I’ve asked Westergren, and CTO Tom Conrad, to provide me with a real number that reflects that rate decrease they’re seeking, but neither of them wanted to engage on that.

Eventually I got this statement from a Pandora rep: “The nature of any negotiation makes it unwise to discuss details publicly. We’ll save those specifics for conversations with SoundExchange and the CRB. Tim does, however, stand behind his statements that Pandora supports an outcome that would see absolute artist payments go up.”

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